01/10/'07 - Greenback Shows First Positive Sentiment, US ISM Manufacturing

[B]Economic News

USD [/B]

The greenback weakened all across the board on Friday and it closed off the week at another all time low against the EUR. The string of weak US economic data released throughout last week support an additional rate cut by the Fed and this is putting the dollar under pressure. On Friday, the Core PCE Price Index, which measures the rate of inflation experienced by consumers when purchasing goods and services, released inline with expectations at 0.1 %. This data provided a strong indication to the market that although the Fed cut the interest rate significantly to 4.75 % there is still room for a further rate cut because the inflationary pressures are not taking effect yet as there was only a slight increase in consumer prices. Therefore the greenback plummeted on the back of this news hitting all time lows against multiple currencies, particularly against the EUR, as the interest rate differential between the US and Europe is expected to continue to tighten while the growth differential is expected to widen to Europe’s favor . The current market sentiment is very dollar bearish as the US economy is expected to expand at a much slower rate than previously forecasted and this sluggish growth forecast has prompted market analysts to believe that the Fed will be forced to cut the interest to 4.0 % in 2008 in order to stimulate growth.

Looking ahead, there will be some key US economic data releases this week kicking off today with the ISM Manufacturing Index and The ISM Manufacturing Prices. These figures may cause some volatility as the Fed is now keeping a close watch on all the indicators to determine its future monetary policy. However, this weeks’ trading may be somewhat range bound as the market will begin to shift its focus to Friday’s all- important Non Farm Payrolls report. If the US data releases will continue to disappoint this week, than the greenback will remain under pressure as expecations of another rate cut increase while some positive news will provide the greenback with reprieve as the EUR and GBP should be well past their peak.

[B]EUR [/B]

The EUR continued on its record setting trend as it closed on a new all time high against the greenback on Friday. The strong EUR may cause serious repercussions for the European Union as their exporters will find it increasingly difficult to compete against the US and Chinese exporters in the global market. Nevertheless, ECB President Trichet is still maintaining a hawkish stance that the strong EUR will not have any serious negative impact on the European economy. However the ECB may have to change its tune very soon as weaker inflation and consumer confidence reports are indicating that the strong EUR is beginning to take its toll on the European economy. Also due to the spreading global credit crisis, that has left a significant imprint on Europe, the ECB is unlikely to raise its interest rate in the near future as it will not want to rock the boat. So in next weeks’, ECB monetary policy meeting, Trichet is expected to have a dovish stance in regards to future policy. The EUR should be nearing the end of its bullish run as the strong currency is causing cracks to appear in the European economy and a rate hike in the near future is highly unlikely, however weak US data is preventing a reversal and driving the European currency to new heights.


Earlier today in the Asian trading session the Japanese Tankan Large Manufactures Index, which measures the business conditions of large manufacturers, released at 23 beating the expected figure of 21. Although US economic growth is slowing, the Japanese business confidence is holding steady near a two-year high as companies are increasing expenditure plans. The Tankan also indicated that large Japanese companies increased their profit and sales estimates for the current financial year. Nevertheless this was not enough to boost the JPY, and on the contrary, the Japanese currency lost ground particularly against the high yielding currencies as a rally in Asian stocks brought back investors risk appetite thereby spurring on carry trades. Therefore the direction of the JPY over the next week is still likely to remain heavily correlated to the Dow.

[B]Technical News


The pair closed at another all time high of 1.4280, on Friday and is now consolidating around 1.4250. The hourlies are starting to show bearish signals that might indicate a correction. The dailies are showing multiple bearish crosses and proving that it’s only a matter of time before the pair pulls back to the 1.40-1.41 levels.


There was a violent breach through the 2.0400 level on Friday. The dailies are pointing to a target of 2.0600 and are starting to be a bit bearish. It might be preferable to buy on dips as a correction on the hourly level is quite imminent.


The pair has been trading a wide range for a while now, and is showing no significant direction on the daily studies. The hourlies are bullish and showing potential momentum which might take the pair back to 116.00 soon. Due to lack of a significant trend, traders should consider the pair for intraday trading, and avoid position trading.


After hitting rock bottom at 1.1620, the pair is showing a slight pick-up to the 1.1660 level. The dailies are showing a very strong bullish cross, and together with an extremely oversold 4 Hour chart the bullish correction move seems inevitable. 1.1700 appears to be the next target price.

[B]The Wild Card

Crude Oil [/B]

The massive uptrend continues as can be clearly seen on the daily chart. The slow stochastic is floating at 60, and a double doji formation indicates a further break is close. The hourlies are showing a bullish cross and together with a bullish RSI value provides a great opportunity for Forex traders to resume the strong uptrend.